FOMC Meeting: Watch for "Half-Baked Data" Supporting Lower Rates

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FOMC MeetingThe U.S. Federal Reserve will convene its two-day Federal Open Market Committee (FOMC) meeting today (Tuesday), its fourth of the year and the third with Fed Chairwoman Janet Yellen in charge.  The FOMC is expected to announce a further reduction in the Fed's ongoing asset-buying program, but the real question is where short-term interest rates are headed.

After March's FOMC meeting, the Fed reaffirmed its commitment to keeping the federal funds target rate within the 0% to 0.25% window – where it has been since December 2008 – for a "considerable" period, but in the following press conference Yellen indicated that rate hikes could happen just six months after the end of this period of monetary easing.  

This would establish an earlier timetable for rate hikes than what many investors had anticipated, as evidenced by the market drops on that day. The Dow Jones Industrial Average lost 114.02 points on the day, while the S&P 500 Index lost 11.48 points and the Nasdaq dropped 25.71 points.

Further fueling interest rate concerns after the March FOMC meeting was Fed observers' fixation on the "dot plot" – a scatter plot displaying FOMC participants' expectations (scroll to page 3 here for plotted data). The graph showed a slight shift in the projections for the Fed funds rate, with more FOMC participants expecting larger rate increases in 2015 compared to what they expected in earlier meetings.

At the March post-FOMC meeting press conference, Yellen dismissed concerns over the shift in the dot plot.

"There is only very limited upward drift," Yellen said.  "I think that one should not look to the dot plot, so to speak, as the primary way in which the Committee wants to or is speaking about policy to the public at large."

Yellen added that the shift could be explained by faster labor market improvements than expected. This jobs market has been the story recently, as reports indicate the economy has added more than 200,000 jobs in each of the last two months while the unemployment rate dropped to 6.3%.

But, recent developments make the dot-plot projections seem obsolete …

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